New Zealand Trusts for US Citizens

Although this is a subject area I’ve written on many times in the past, the question of the viability of US citizens being involved with NZ trusts is never entirely solved.

Of course, as many will be aware of, New Zealand has one of the highest amount of trusts per capita in the world, and despite their tax efficiency decreasing in recent years, they are still very much commonplace.

When involving a US citizen in a New Zealand trust, it is essential to obtain US tax advice from a qualified profession. At the US Tax Team, we offer one-off US tax advice with our US tax consultant, David Tzimenakis.

But, before obtaining advice, we’ll just go over below some of the key issues US citizens face with New Zealand trusts. Whilst the below isn’t intended to deter anyone from creating a trust, as we each have specific circumstances as to why a trust may be needed, it is definitely worth going into the process with your eyes wide open from a US tax perspective.

All of the below points are made on the assumption we have a US citizen involved with a New Zealand trust.

US Filing Requirements for New Zealand Trusts

We’ll begin with discussing the filing obligations, which as you might expect, are complex and time consuming.

Generally speaking, the grantor (the owner) of a New Zealand trust along with beneficiaries in certain cases, have an obligation to file Form 3520 and 3520-A, or possibly just one of the two.

These forms are exceptionally complex from a US tax preparation perspective, and as a result, individuals who require these forms should expect fairly significant preparation fees internationally.

The complexity of US filings for foreign trusts became so due to legislation introduced in the 1990’s, US tax code sections 671-679. These laws created complicated reporting obligations for US citizens who are involved in foreign (ie NZ) trusts, along with strict penalties for failure to comply.

These laws came about due to widespread use of foreign trusts as a method to lower US tax liabilities. These laws put an end to this situation.

How Does the US Tax a New Zealand Foreign Grantor Trust

Generally speaking, distributions to a US citizen from a foreign grantor trust are usually tax free.

You may have noticed that I’ve thrown in a new term here, Grantor Trust. Generally, the US has two separate types of classification of a foreign trust, grantor and non-grantor.

Most New Zealand trusts fall under the definition of a grantor trust, whilst a smaller amount tend to be treated as a non-grantor trust.

Your US tax professional should be able to make this determination on how the IRS classifies your trust (or the trust you may create). Specific conditions in the trust deed need to exist for a NZ trust to be treated as a grantor trust.

So, as a first step in assessing a New Zealand trust, we need to determine if it will be a grantor or non-grantor trust.

As mentioned above, distributions to US citizens from a grantor trust are usually tax free.

The US tax imposed on distributions to a US citizen from a non-grantor trust, can be punitive. I’ve discussed this in my article here.

You might be thinking at this stage, well, creating a trust isn’t an issue as long as you make sure it is classified as a grantor trust (tax free distributions).

Unfortunately it isn’t as simple as this. In most cases, once the grantor (owner) of a foreign trust passes away, the grantor trust immediately becomes a non-grantor trust. This can result in taxable distributions to beneficiaries, and a difficult situation that beneficiaries of an estate are unable to fix (other than to simply pay the US tax). This can be especially difficult in the instance the grantor passes suddenly or unexpectedly.

Obtaining US tax advice from a US tax consultant, such as The US Tax Team is essential here.

Penalties for Late Filing of Trust Forms

For those considering creating a New Zealand trust, thought should be put into the fact these potentially costly filing requirements will exist each year, along with failure to file penalties which can be punitive. Penalties for missing the 15^th March initial deadline each year can be $10,000 by default, or potentially up to 25% of the value of the trust.

This does mean that once a trust is opened, you must maintain a strict calendar each year to ensure you file on time.

Summary

Our brief article today was just to highlight some of the key issues surrounding US citizen involvement in New Zealand trusts.

As you have likely gathered from the above, how an NZ trust is taxed in the US can be very complicated. Some trusts can be tax free, others can have a costly tax imposed.

It should be noted that KiwiSaver trusts are treated differently to the above.

Before creating a New Zealand trust, you should discuss with your lawyer or financial adviser whether a trust is absolutely necessary for the goals you’re looking to achieve. If indeed a trust is needed, obtaining US tax advice is the next must-do step in your process to ensure an efficient tax outcome.

If you’d like to discuss further, reach out to New Zealand’s US Tax Specialists – The US Tax Team – info@usatax.nz